Computer Sciences Corporation: Outsourcing powerhouse

istockphoto/thinkstock
a supplier profile from
ComputerWeekly
Computer Sciences Corporation:
Outsourcing powerhouse
CSC’s outsourcing journey
has brought it full circle
The acquisitive IT outsourcer has grown and evolved over the
years, but the company is returning to its origins as it undergoes
a huge restructuring exercise and moves into cloud services,
writes Mark Ballard
ComputerWeekly
CSC won its first
government contract with
Nasa in 1961 and went on
to work on the Apollo moon
landings, the Space
Shuttle missions
and the Hubble
Telescope
The last thing anyone in the IT industry would expect to hear about Computer
Sciences Corporation (CSC) is that it had been implicated in the illegal rendition
of European citizens in the US CIA’s “war on terror”.
But that is what Reprieve, a legal charity, began telling CSC’s customers in
summer 2012. It had unearthed documents it said proved CSC managed flights
used by the CIA in a programme to abduct, and in some cases torture, people it
suspected of being terrorists but it transpired were not.
The allegations raised unexpected controversy for a company more commonly
known as an IT outsourcer. The CSC that people normally get to hear about
manages fleets of desktop computers for large corporations and builds
complex software systems for civil government bodies. It manages the
computer infrastructure of multinationals such as ArcelorMittal, the world’s
largest steel producer, and is famed for taking on risky projects such as the
UK National Health Service’s National Programme for IT.
And it is revered by leading US market research firms. “CSC is a great
company,” says Alexander Matsenigos, a vice-president with the International
Data Corporation. “It is one of a few companies in the world that can handle
billion-dollar deals. It has a reach into government that others don’t. It has the
strength, the breadth, the capabilities, the assets.”
Military beginnings
Yet the largest part of CSC’s business has always been with US military
forces and weapons manufacturers. Since it was formed in 1959 by three
programmers working in aerospace at the height of the cold war, a commercial
alliance with American military and aerospace has been the driving force behind
CSC’s expansion into civil sectors.
CSC was formed in what was the crucible of the computing industry – the hub
of aerospace companies around Los Angeles in the 1950s. One of its founders,
Robert Patrick, had previously built targeting systems for US intercontinental
ballistic missiles. Louis Gatt, its star programmer, had worked at Los Alamos,
the secret laboratory town where the US developed the atomic bomb.
Fletcher Jones, another CSC founder, brought the majority of its earliest
engineering recruits with him from North American Aviation, which had closed
its own intercontinental ballistic missile and fighter plane programmes to develop
space missions for Nasa.
CSC won its first government contract with Nasa in 1961 and went on to work on
the Apollo moon landings, the Space Shuttle missions and the Hubble Telescope.
Flush with early success in aerospace, CSC made its first acquisition with the
military satellite and global military communications arms of the International
Telephone and Telegraph Corporation (ITTC) in 1965.
-2-
“CSC is a great
company. It is
one of a few in the
world that can
handle billion-dollar
deals. It has a reach
into government
that others don’t. It
has the strength,
the breadth, the
capabilities, the
assets”
Alexander Matsenigos, IDC
stockbyte/thinkstock
a supplier profile from
a supplier profile from
The Infonet mainframe network
By 1969, CSC had launched Infonet, a commercial network of mainframe
computing centres serving primarily US government and military customers, but
underpinning its push into multinational civil computing, particularly in Europe.
Infonet was like an early precursor to the cloud – CSC would rent computer and
software services over cables to companies that could ill-afford to invest in such
resources themselves.
CSC has always made its defence work a unique selling point in pitches for
civil business. It helped CSC’s pitch in 1971, for example, when it built the
world’s first real-time freight handling system at London Heathrow Airport in a
joint venture with the Post Office, Cossor Electronics (now a part of defence
contractor Raytheon), and ICL. CSC and the Post Office went on to sell
their system in other countries, helping CSC establish offices in France, the
Netherlands and West Germany.
Large civil projects became a trademark of CSC. But Infonet formed the
backbone of its business, says Lindy Murrell, who sold Infonet services to
multinationals in Europe in the 1970s and 1980s and is now winding the
network up, as its director of finance under BT (formerly the Post Office), now
its owner.
“We realised that CSC’s main business was this Infonet thing. In those days we
brought in the majority of money for CSC,” she says.
The growth of outsourcing
By the end of the 1980s, however, client-server computing and recession had
undermined the Infonet business model. It became cheaper for corporations
to do their own computing. To make matters worse, the end of the Cold War
wreaked havoc on the defence sector, where CSC did its primary business.
Defence spending halved. A fraud probe scandalised the industry.
Defence contractors, including CSC, responded with restructures and a bid
to replace lost sales with civil commercial business. CSC sold Infonet to a
telecoms consortium, spent $500m acquiring consultancies and systems
integrators, and burst into the then nascent outsourcing industry with the
biggest deal the world had seen.
The world had not seen much outsourcing. Information Services Group (ISG),
a research firm, recorded 22 large outsourcing deals when records began in
Revenue by geography, 2012
US Federal
36%
US commercial
16%
EU (excl. UK)
UK
10%
25%
Other
13%
Source: US Securities & Exchange Commission/
UK Companies House/Computer Weekly
-3-
ComputerWeekly
Main activities
CSC’s publicly announced activities
in 2011 include: a US immigration
database of 100 million people;
overseas visa registrations for
Canada; cloud administration of 50
million educational qualifications, and
of workers’ compensation claims;
complaints and queries to the
Department of Labor; and health
benefit data processing.
Its work in geophysics, ongoing since
the 1960s, was also prominent in
2011 in: atmospheric, oceanic and
weather monitoring and modelling;
monitoring and administration also of
hazardous waste sites; and water
security.
Beyond intelligence, CSC has long
been a leader in control systems,
where it was still at the fore in 2011
with numerous announcements,
from the redesign of US civil and
Army air traffic control to battlefield
command and control.
Its military successes in 2011 were
meanwhile as diverse as engineering
on the Navy’s DDG 1000 Zumwalt
Class Destroyer, to software
engineering on ballistic missile
defence and submarine base
security. Notwithstanding CSC’s
implication in illegal rendition, its
ongoing work in more controversial
areas includes the development of
anthrax and plague vaccines for
biological warfare.
a supplier profile from
1990. Many were as large as $200m over 10 years. CSC debuted in 1991
with a $3bn, 10-year outsourcing contract with weapons manufacturer
General Dynamics.
ComputerWeekly
CSC UK
executives
The pair portrayed it as a strategic win-win. CSC wanted to get into commercial
outsourcing, but lacked credibility. General Dynamics wanted the flexibility to
restructure, but had 3,500 IT staff and five datacentres.
Liz Benison
President
Similarly, CSC won a $1bn, 10-year outsourcing project with British Aerospace
(BAE) in 1994 that put it back on the map in Europe, as CSC’s then CEOdesignate Van Honeycutt described it at the time.
Angela Bowland
Vice-president, strategy and
marketing
By 1995, three-quarters of CSC’s European business was with BAE. And 73%
of its US commercial wins that year came from companies spun out of General
Dynamics’ restructure.
Amanda Brumpton
Vice-president, sales
Landmark civil outsourcing contracts quickly followed. Most notable was a 10year, $300m project in 1995 with Anglian Water, whose then IT director, Peter
Wells, had started his career as a business manager at CSC defence partner
Cossor Electronics.
These deals, in particular, helped CSC diversify. Its income with non-USfederal customers grew from around one-third in 1986 to two-thirds in
1996. It piled its earnings into an acquisition spree, acquiring more than 100
companies in 20 years.
The stock market rewarded it richly for pioneering the outsourcing business
model with this self-styled “aggressive” grab for market share. It consistently
outperformed stock market indices for more than 20 years.
Many of its acquisitions were the IT divisions and datacentres of customers with
which it did its outsourcing deals – the very datacentres that had undermined its
Infonet business.
Analysts say CSC’s aim was to acquire resources it could use to service
the globalising efforts of western multinationals. The deal that gave it the
multinational outsourcing footprint it sought came in 1997 with Dupont, the US
chemicals giant that had worked alongside CSC in 1950s aerospace.
Described as “one of the largest and most innovative technology agreements
in history”, the $4bn, 10-year deal gave CSC 26,000 IT staff in 12 countries
and management of a network of 55,000 computers and applications
spanning 40 countries.
“The fundamental model at the time was resources,” says Richard Sykes, a
consultant who studied CSC as head of IT at ICI in the early 1990s.
“It was the bums on seats model. When you did a quarterly report, you’d talk
about what new deals you’d won, your headcount growth and margins. You’d
get more and more datacentres and more and more people creating software
for clients,” he says.
Moving offshore
Like other suppliers, CSC began using cheap offshore resources to make its
outsourcing deals attractive to customers. It found common cause with the
US Department of Defence’s revered Software Engineering Institute (SEI) at
Carnegie Mellon University.
SEI became instrumental in the globalisation of the IT industry.
-4-
Chris Doutney
Vice-president, public sector
Dave Baldwin
Vice-president, technology and
consumer services
John Hobson
Director, human resources
Kevin Kearns
Vice-president, finance
Mark Farrell
Vice-president, Royal Mail Group
account
Steve Short
Vice-president, financial services
Sheri Thureen
President, UK healthcare
Tig Matthews
Regional commercial director
Matthew Doucy
Director, BAE Systems account
Note: Biographies were unavailable
for CSC UK executives
a supplier profile from
In 1991, as the first shoots of growth appeared in the Indian IT industry,
SEI produced the Capability Maturity Model: a software development metric
that became the standard way for outsourcers such as CSC to reassure
western customers that their low-cost service centres in locations such as
India were reliable.
ComputerWeekly
Software assets
Gross of amortisation, 1994-2012
CSC’s Nasa unit was the sixth in the world to achieve SEI’s optimum level five
maturity rating. By 2003, 75% of organisations at level five were in India.
Anglian Water was a case in point. CSC cut a deal with Indian outsourcer
Cognizant in 1999 to service its Anglian contract. When Anglian renewed the
contract in 2005 with CSC, it was at 20% of the original cost.
“That’s what any outsource contract really is,” says Mark Turner, an Ernst &
Young consultant who led the team that won Anglian for Capgemini in 2010.
“It’s about reducing internal overheads and shipping work to India.”
CSC has since managed to move about half of its resources into offshore
locations, and nearshore ones in Eastern Europe, its chief executive Mike
Lawrie estimates.
However, IDC’s Matsenigos says it is no longer enough for outsourcers to sell
out of offshore locations – they must sell into offshore markets as well.
Emerging markets
This is where CSC faces an uphill struggle. The company generates two-thirds
of its income in the US, but is yet to make significant inroads into the fastgrowing emerging markets.
According to the Organisation for Economic Co-operation and Development
(OECD), IT and telecoms spending has grown faster in Eastern Europe,
South America, the Middle East and Africa since 2003 than in the western
industrial countries.
And while IT spending in India, Indonesia and the Russian Federation grew
by over 15% annually for most of the past decade, CSC’s non-European
international business grew just three percentage points.
Declining fortunes
Against this background, CSC’s revenue has gone into decline. It grew 20-fold
between the start of its expansion in the late 1980s and its recent height of
around $16bn. But it plateaued in 2005, and has fluctuated and fallen since.
Lawrie says further revenue decline is likely.
CSC posted a $4bn loss in 2012 – a quarter of its revenue. Its share price fell
to levels not seen since the early 1990s, when it metamorphosed into the IT
outsourcing giant it is today.
-5-
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
This has been exacerbated by accounting problems that have surfaced in
various CSC subsidiaries since the downturn. They became the subject of a
fraud investigation and have led it to sack senior finance staff in three countries.
$71m
$94m
$220m
$286m
$246m
$333m
$467m
$527m
$712m
$783m
$918m
$1.1bn
$1.2bn
$1.3bn
$1.5bn
$1.6bn
$1.7bn
$1.8bn
$2.1bn
CSC’s UK business – its primary source of international sales since the 1970s
– has declined steadily since 2005 when major contracts, including Anglian
and Royal Mail, were renegotiated. Most of its major UK contracts – including
the Atomic Energy Agency, Network Rail, the Post Office and UK Visas – are
approaching the end of their lives, according to Kable Research. Of the $4bn of
UK public contract awards tracked by Kable in 2011, CSC won nothing.
Source: Securities & Exchange Commission/Computer Weekly
a supplier profile from
Underperforming contracts
Now they are not obscured by rapid growth, some of CSC’s offshore outsourcing
deals do not look hugely profitable on paper. Lawrie said on announcing CSC’s
loss in May 2012 that 40 of its large outsourcing contracts were underperforming
and would have to be renegotiated if they could not be fixed.
That the economics of offshoring was tight is apparent from the accounts of the
third landmark deal that defined CSC as an outsourcer in the UK. This was the
10-year, £1.5bn outsourcing project that CSC carried out for Royal Mail in 2003,
in a consortium with BT and offshore outsourcer Xansa.
ComputerWeekly
It may not have
been possible for
CSC to turn a profit
on its Royal Mail
contract without
job cuts and
tax breaks
CSC executives
Mike Lawrie, president and chief executive officer
He is credited with turnaround at UK finance and health software
company Misys. Lawrie, a seasoned corporate administrator,
joined CSC in March 2012. He previously spent 27 years at
IBM. He also spent one year as Siebel CEO and one year as a
venture capitalist.
Peter Allen, president, global sales and marketing
Allen is also acting head of CSC’s struggling outsourcing
business. He was marketing chief at outsource champion TPI
from 2001 to 2009. He spent the previous 20 years in defence
research and intelligence systems. Computer science graduate.
Thomas Colan, vice-president, controller and principal
accounting officer
Colan is a turnaround expert. He is former financial chief of
broadcasters Discovery and AOL Time Warner. Previous
employers include Coopers & Lybrand, Planning Research
Corporation and General Telephone & Electronics.
Paul Saleh, chief financial officer
Appointed in May 2012, Saleh knows about old companies
struggling with seismic change and dwindling income. His
previous job was with regional newspaper publisher Gannett.
Prior to that he was CFO at Disney and Sprint Nextel. He also did
a stint at Honeywell.
William Deckelman, vice-president and general counsel
Deckelman has experience in handling probes into dodgy
accounting. Before joining CSC in 2008, he withstood an SEC
probe as vice-president and counsel at Xerox outsourcer
Affiliated Computer Services, during which both the CEO and
CFO resigned over fiddled stock options.
James Cook, president, business solutions and services
Cook is an all rounder. He was a one-time US Army captain and
has a Stanford MBA and MIT. He has been a CIO and headed
manufacturing, marketing, brand management, sales, etc. He was
previously head of CSC financial services, and has also spent time
at Philip Morris, Kraft Foods, GE and Chase Manhattan.
Thomas Hogan, executive vice-president and general
manager, global business services and regions
Hogan is charged with turning CSC software IP into a sectorbranded global consulting and application services business. He
is a veteran sales chief, previously holding posts at HP, Vignette,
Siebel and IBM. He is educated in international business,
organisational behaviour and biomedical engineering.
Gary Budzinski, president, global infrastructure services
Budzinski started in 1978 as systems architect at General Motors.
He has been a chief since 1985. His previous employment includes
EDS and vice-president of warranty services at Hewlett-Packard.
He is a people person, an outsource and human resources expert,
and a maths graduate.
David Zolet, president, North American public sector
Zolet jumped ship from IBM public sector in 2010, after which
IBM sued. He also spent a short stint as IBM vice-president of
enterprise infrastructure. He spent the prior 20 years at weapons
manufacturer Northrop Grumman heading IT, defence, and
homeland security. He is an electronics graduate.
Nelson Eng, vice-president, strategy and corporate
business development
Eng implemented Lawrie’s turnaround and sell-off at Misys. He is
also a prior reformer at business intelligence and outsourcer
eFunds. He previously held posts at Oracle, Dell, Vignette and IBM.
Sunita Holzer, vice-president and chief human
resources officer
Holzer joined CSC in June 2012 after less than 12 months
at energy utility South Jersey Industries. Holzer has previous
human resources experience at Chubb, GE Capital and
American Express, and spent three years on the board of
Jersey Battered Women Services. Psychology and Harvard
business graduate.
Peter Minan, vice-president, enterprise risk
management and internal audit
Minan was appointed in January 2012 to head internal audits
after SEC launched an investigation into CSC accounting
problems. He spent 28 years at KPMG’s Washington practice
serving government and Beltway contractors such as CSC.
Minan is an experienced multinational auditor.
-6-
a supplier profile from
The accounts of CSC Business Systems (the Royal Mail unit it acquired) over
the past 10 years show that CSC made the deal work by cutting 1,082 jobs.
That was 74% of the 1,470 Royal Mail IT staff it acquired in 2003, cutting an
aggregate £279m from CSC’s RMBS payroll. The government helped CSC
balance the books with £62m of tax breaks, despite the job cuts.
It may not have been possible for CSC to turn a profit on the Royal Mail
contract without job cuts and tax breaks. By 2011 it had made CSC an
aggregate loss of £12.5m, according to Computer Weekly’s analysis of its
annual accounts, on aggregate turnover of £1.5bn. CSC had always intended
the deal to be profitable only by its conclusion.
But CSC nevertheless came away with valuable assets, including datacentres,
600 software applications and business to move offshore. And these deals
created irrefutable economies for customers. Motorola cut IT costs by 35%
in 2003, by selling 60% of its IT staff to CSC in a 10-year, $1.6bn outsourcing
deal, according to an analysis by Keith Leust, a human resources executive who
helped do the deal.
Motorola was spending 30% more on IT than its competitors before it
outsourced. CSC made Motorola look competitive for its subsequent restructure
and sell-off, by performing a massive consolidation: 176 datacentres merged
into 11; 100 IT units into one; IT contracts cut by two-thirds; staff cut by
75% to 1,000.
Total publicised contract values, 2011
$800m
$2bn
Military and defence
Non-US-Federal,
military or defence
$1.1bn
ComputerWeekly
CSC staff numbers
1994
30,000
1995
33,000
1996
40,000
1997
45,000
1998
45,000
1999
52,000
2000
57,000
2001
68,000
2002
67,000
2003
90,000
2004
91,000
2005
78,000
2006
78,000
2007
87,000
2008
90,000
2009
92,000
2010
94,000
2011
91,000
2012
97,000
Strategic US agencies
(Homeland Security, Department
of State, National Oceanic &
Atmospheric Administration)
$1.2bn
Other federal agencies
Source: CSC/Computer Weekly
Total publicised contract numbers, 2011
3
1
Federal
15
Military
9
Foreign borders agency
Non-military private sector
Source: CSC/Computer Weekly
-7-
Source: Securities & Exchange Commission/CSC/
Moody’s Investment Manuals/Computer Weekly
a supplier profile from
“Our software assets are
very valuable, and have
largely been buried
within the company”
ComputerWeekly
CSC-owned
companies
Mike Lawrie, CEO, CSC
Yet these deals did not always work out as expected. The Motorola deal
generated complaints that in focusing on the cost of computing above all else,
Motorola had lost sight of its purpose.
Similarly, when in 2010 Royal Mail refreshed its CSC outsourcing deal
with a ground-breaking cloud computing project, Adrian Steel, head of IT
infrastructure at the postal service, complained that its desktop systems had
become “creaking”, slow and expensive. It had suffered from years of underinvestment. How had CSC let it get into this state after it took on RM’s IT in
2003? CSC has not answered.
Obsession with costs
The problem was the outsourcing model’s obsession with costs, says a
consultant at market research firm Gartner, who asked to remain anonymous.
Price had been the easiest metric to measure when these deals were done,
he says. Price was easy to put on a spreadsheet and easy for business
managers to understand. The other possible priorities of computerisation did
not get a look-in.
“Contracts that involve only cost savings end up causing dissatisfaction down
the line,” he says. “You will rue the day you made the decision – that’s been the
evidence for some time.”
Analysts say customers now want something more from their IT. CSC says the
same. Its last CEO, Mike Laphen, said before his retirement, in March 2012, that
customer priorities had shifted, “from cost-avoidance to capability expansion”.
CSC UK revenues
2500
2000
1500
1000
Alliance-One Services
CenTauri Solutions
Century Credit Corporation
Continental Grand, Ltd Partnership
Covansys
CSA (PRC) Company Ltd
CSCSpace Company LLC
Datatrac Information Services
(Integrated Customer Solutions)
Dekru BV
DM Petroleum Operations Company
DynCorp
DynKePRO, LLC
DynMeridian Corporation
DynPort Vaccine Company LLC
Eastview (China) Group Limited
Everlasting Properties Limited
Experteam SA/NV
First Consulting Group GmbH
Fortune InfoTech Ltd.
Image Solutions, Inc.
Innovative Banking Solutions AG
ISI (China) Co.
ISI (UK)
ITS Medical Systems LLC
Log.Sec Corporation
Mississippi Space Services
Mynd Corporation (f/k/a DI Asset
Corporation)
Mynd International
Mynd Partners (f/k/a Legalgard
Partners, LP)
Mynd Partners, LP (f/k/a Cybertek
Solutions, LP)
Paxus Australia Pty
PDA Software Services
PT CSC Indonesia
Space Coast Launch Services LLC
Supreme Esteem
Technology Service Partners
Test and Experimentation Services Co.
The Eagle Alliance
The LogSec Group JV (Partnership)
Tianjin CSA Computer Sciences
Technology Company Limited
Tri-S Incorporated
UAB CSC Baltic
Vulnerability Research Labs, LLC
Welkin Associates, Ltd
2011
2012
2010
2009
2008
2007
2006
2005
2003
2004
2001
2002
2000
1999
1998
1997
1996
1995
1993
1994
1991
1992
1990
1989
1988
1987
1986
1985
1983
1984
1981
1982
0
1980
500
CSC UK revenue (£m)
Source: Securities and Exchange Commission,/Companies House/Computer Weekly
-8-
Source: CSC 10-K/Securities and
Exchange Commission, 2011/
Computer Weekly
a supplier profile from
The software crisis
But the IT industry’s track record for putting capability before cost is not very
good either.
Since its 1970s exploits in airport systems, CSC has been known as a company
that does big civil software projects. Even before then, big software projects had a
reputation for being delivered over budget, over schedule and below expectations.
ComputerWeekly
CSC has ported its
own applications
to the cloud and
bottled its experience
for selling
This trait was known for a long time as the software crisis. It was recognised
through the 1990s. CSC nevertheless established a reputation – mostly with
Nasa – as a company that could be relied on for ambitious software builds.
SEI gave its first Software Process Achievement Award to CSC in 1994. CSC
branded its techniques and told customers they would cut development times
by two-thirds. It told investors they would make its business boom.
It was subsequently contracted to run a raft of ambitious projects, such as
the 1999 US Army Logistics Modernization Programme (LMP), said then
to have been the largest logistics system ever attempted. Yet when CSC
marked the conclusion of LMP in 2011, four years late, it did so with a $269m
compensation payment to the US Army.
Likewise in 2003, when it reported a 65% cut in error rates in its bespoke software,
it won a share of the UK National Health Service’s National Programme for IT (NHS
NPfIT), said then to be the biggest civil software project ever attempted.
CSC US contract wins, 2011
Source: US Federal
Procurement Data System
Commerce $36m
GSA $89m
Education $6m (not visible on chart)
Justice $18m
Environmental Protection Agency $95m
Homeland Security $521m
State $72m
Transportation $55m
Nasa $209m
Treasury $131m
Health & Human Services $170m
Computer Sciences Raytheon USAF $91m
Labor $89m
Energy $141m
Department of Defence $2.8bn
-9-
a supplier profile from
In 2012, it wrote off $1.5bn it had invested in software for the NHS, and is still
negotiating with the UK government over cancellation of the contract. By May
2011, five years after CSC’s first deadline, 96% of contracted hospitals and
100% of mental health trusts were still waiting on its software.
CSC was sacked in 2012 from another large project it took on in 2004: the
US Air Force’s Expeditionary Combat Support System (ECSS) – an Oracle
integration for an incredible 750,000 users. USAF cancelled the project after it
went $2.2bn over budget and four years behind schedule.
ComputerWeekly
CSC’s specialism
is large-scale
civilian identification
and entitlement
programs
The upshot of these failures, in addition to exacerbating CSC’s financial
hardships, has been widespread calls for reform of large IT projects. Laphen
answered them by directing CSC to adapt to what he said was another change
in customer priorities, “from build to buy”.
Customers had got fed up with big software builds going wrong. They simply
wanted to buy software that worked. CSC was going to do this for them.
But not without another transformation that may be as significant as that
which turned it into an outsourcer. The combined pressures of software failure,
disappointment in outsourcing, financial decline, accounting scandal and shifting
markets have increased the likelihood of change.
Speculation resurfaced last year of a CSC takeover or merger, as has long been
rumoured and even occasionally explored since the 1960s.
Reinventing CSC
This is where CSC’s new chief executive comes in.
Appointed in March 2012, Mike Lawrie is a seasoned corporate administrator
with a reputation as a fixer. His last turnaround job at Misys, a UK financial
services software house, involved a break-up and a merger.
CSC Department of Defence contract wins, 2011
$188m
$87m
$634m
Navy $634m
Army $1.3bn
$581m
Air Force $581m
Defence information $188m
$1.3bn
Missile defence $87m
Source: US Federal Procurement Data System
-10-
a supplier profile from
Giving Wall Street analysts a sketch of his plans in May 2012, Lawrie portrayed
CSC as a company that, after two decades of rapid, acquisitive growth, had
become sprawling and unmanageable. Filings at the Securities & Exchanges
Commission (SEC) show it has 170 subsidiaries in 69 countries.
“There’s not a great example in the technology industry of a company that really
works as a holding company,” he told analysts.
Outgoing chief finance officer Mike Manusco drew an analogy, in the same
briefing, between running CSC and a hospital emergency room: “Most of the
time, the patient was wheeled into corporate on the gurney, just about to die,”
he said.
Lawrie proposed merging CSC’s back-office systems to make it more
manageable – as it has been doing for its outsourcing customers for years.
ComputerWeekly
Incoming CEO Mike
Lawrie portrayed
CSC as a company
that, after two
decades of rapid,
acquisitive growth,
had become
sprawling and
unmanageable
He had identified $1bn of cuts. Finance, product management, sales, payroll
and human resources departments would all be consolidated. Unprofitable
parts of the business would be “pruned”. The rest would be turned into a single
operating company that could be better operated from the top.
And in keeping with both Lawrie’s mantras of “build to buy” and “cost to
capability”, he would change the way CSC served its customers.
This would constitute a radical departure for a company that has always been a
pridefully independent producer of bespoke software. But CSC has, in 50 years,
developed and acquired a lot of software that Lawrie thinks it could exploit
better if it simply packaged it up and sold it over the wires, much like it did in its
Infonet days.
Significant CSC subsidiaries
Number of significant
subsidiaries
Source: US Securities and Exchange Commission/Computer Weekly
-11-
a supplier profile from
The race to the cloud
CSC’s software assets have grown 30-fold in the 20 years since it started its
post-Cold War expansion, its SEC filings over that time reveal. Its software
assets have grown faster even than its revenue. Their book value, at $2bn,
overtook that of its outsourcing contracts for the first time in 2012.
“We think our software assets are very valuable, and have largely been buried
within the company,” Lawrie told analysts.
CSC would turn its software into “standardised global solutions that can be
delivered profitably to any client”, he said. It would “refocus” its portfolio on
choice industry sectors where it had “a lot of intellectual property”.
It was, in effect, becoming a cloud software services company. It had already
been undergoing this transition – what analysts are calling the industrialisation of
computing – before Lawrie presented it as a turnaround plan.
ComputerWeekly
CSC’s transformation
into an industrial
computing giant is
progressing well –
linking datacentres
into a single cloud
“fabric”, porting its
own applications to
the cloud and
bottling its experience
for selling
CSC has already moved quickly to deliver cloud services to the NHS, Siki
Giunta, CSC’s vice-president of cloud computing, tells Computer Weekly.
The NHS had claimed, contractually, intellectual property rights over any
software CSC delivered to the programme. CSC instead turned its iSoft NHS
patient records system into a cloud service over which it holds the rights.
“We just started with some of the trusts,” says Giunta, though CSC has yet to
deliver software that meets the requirements of its 2003 contract.
CSC may have written off $1.5bn it expected to earn from its NHS contract,
but it has already started exploiting its investment in the iSoft NHS system
elsewhere. It is selling it as a health software service to hospitals in other
countries, and has special designs on the US, where it is already a leading
provider of health insurance software and services.
The company’s US health insurance software might, in turn, prove valuable in
the UK, where CSC’s delays in delivering NHS software helped the coalition
government to portray the public health service as an ineffectual monolith it is
now subjecting to privatising reforms. The NHS affair was not all bad for CSC.
Are customers ready for cloud applications?
CSC’s transformation into an industrial computing giant is meanwhile
progressing well.
CSC UK locations
Giunta says it had, by 2012, linked 13 of 46 datacentres into a single cloud
“fabric”, so they behave as one adaptable infrastructure. It has ported its own
applications to the cloud and bottled its experience for selling. It has begun
buying applications services companies such as Applabs, and is pushing
customers to put their applications on its cloud platform.
Aldershot (UK & EMEA headquarters)
Banbury
Cheltenham
Chester
Chesterfield
London
Chorley
Dublin
Forss by Thurso
Leeds
Luton
Moor Row (Westlakes)
Preston
Solihull
Warrington
Gartner says CSC will become a cloud platform for other software companies
as well.
Commendations from the analyst group have already helped CSC win new
cloud business, says Giunta. The only problem Gartner foresees is that CSC
might not be able to grow its cloud business fast enough. The new model will
require fewer resources and generate less revenue than has been usual in its
heavy-girthed outsourcing business.
Lawrie says it will be more profitable. But can CSC pull it off?
-12-
a supplier profile from
Analysts warn that CSC’s customers might hold it back. Government clients
had already frustrated its plans to offshore jobs in the early noughties, they
say, because of the political difficulties of moving work overseas. Conservative,
regulated customers in its primary security, defence and aerospace sectors are
particularly likely to hold back its cloud business, says IDC’s Matsenigos, amid
concerns over security and data protection.
So far, however, these clients have been among the earliest and most eager
adopters of cloud computing. And they are still the stalwarts of CSC’s balance
sheet. Sales in the US defence, aerospace and security sectors shored up
CSC’s flagging sales in fiscal 2012.
Moreover, CSC already provides cloud services to the Department of Homeland
Security, Nasa and the National Security Agency (NSA). They form the backbone
of its cloud business. The US Department of Defense (DoD), CSC’s biggest
client, has made cloud central to its own strategy as well. The US Navy and
Nasa sit on CSC’s Cloud Advisory Council.
Gartner says CSC’s security work has generated software assets that will
boost its business of renting watertight computer infrastructure and software to
commercial customers through the cloud.
Military and intelligence work
Though Gartner too is shy to cite them, CSC has, since the end of the Cold
War, worked consistently in computer security for military and intelligence bodies
such the NSA. Its declared 2011 activities ranged from emergency telecoms
for Homeland Security to research and development in electronic warfare, and
cyber war operations for the US Air Force.
This may prove invaluable in those sectors related to critical infrastructures
where CSC has established its civil business: transport, utilities, mineral
resources, borders and identity.
The assets it has amassed, as evinced especially by its declared work in 2011,
relate to the application of human and environmental intelligence. This spans
the breadth of its activities, from health records and insurance risk, through to
border security and benefits entitlement.
Its specialism is applications that seek to make security tight and corporate and
government bureaucracies efficient through the classification and management
of people. Or what it calls “large-scale civilian identification and entitlement
management programs”.
Defence, intelligence and large government databases constituted the
majority of CSC’s declared work in 2011. Yet they are not unrelated to its less
controversial commercial work.
Lawrie cites insurance as CSC’s key commercial sector – particularly health and
life insurance – or the calculation of risk in relation to people, which is also a
preoccupation of immigration and homeland security.
ComputerWeekly
1
Number of CSC
acquisitions by year
1983
1985
1988
1990
2002
2005
2006
2007
2009
2
3
5
1984
1989
1992
2004
2010
Insurance was the single area where CSC made most of its public
announcements in 2011. Often its insurance applications were being
licensed or beefed up. Its customers, which have some of the industry’s
largest application outsourcing contracts with CSC, build their commercial
intelligence on its insurance data model, and use its software to build
product models, manage policies and risk-assess individual policy holders.
-13-
7
4
6
1994
2008
1991
1996
1997
2000
2011
1999
2003
Return to Infonet
1982
1986
1993
2001
1987
1995
1998
9
Source: Alacrastore.com/Computer Weekly
a supplier profile from
ComputerWeekly
It has administered US health and insurance systems for decades. Its life
insurance applications command half the market and have given it experience
delivering software as a service (SaaS). It began pushing its cloud software into
the consumer goods sector in 2011 as well. It has long experience in calculating
credit risk that may prove valuable.
These trends may mark a return for CSC to something like the Infonet model
of computing, after distributed systems rendered its services obsolete in the
1980s. CSC brought its commercial potency back with its outsourcing push,
and brought computing back to the centre.
istockphoto/thinkstock
The difference this time is that computing power has increased, and CSC’s
software systems are more sophisticated. Its activities, consequently, have a
more direct bearing not just on industry, but on the ultimate customer of its
customers: the people whom it is contracted by governments and corporations
to administer.
CSC was the 13th largest federal contractor in
2011, ahead of any of its IT competitors, largely by
its contracts with the Department of Defence
-14-
a supplier profile from
ComputerWeekly
Significant CSC acquisitions: 1990 to 2011
YearCompany
Region
Sector
Detail
2011
US
Brazil
Australia US
US/India
Life Sciences
Financial services
Health
Health
IT
Regulatory submissions/cloud
Systems integrator
Patient admin.
Data management/BI
Software testing services
Image Solutions Inc
VIXIA Consultoria e Tecnologia iSOFT Group Ltd
Maricom Systems Inc
AppLabs Technologies
2010 Bass & Co Management Consultants US
Vulnerability Research Labs LLC US
CenTauri Solutions LLC
US
Energy & resourcesConsulting
Cyber security
Intelligence & response
Defence
Surveillance software
2009 BearingPoint Brazil
Brazil
Financial services Formerly KPMG
2008
US
Malaysia
Bulgaria
US
Health
Public sector
IT
Defence
And offshore resources
IT services
Nearshore software development centre
Logistics engineering
2007 Covansys Corp
US/India
IT
$1.3bn for 6,000 staff in India
2006 Datatrac Information Services
US
Security
Federal identity management and intelligence
2005 CSA Holdings
Singapore General
2004 Scandinavian IT Group A/S
EarlyResolution
DynPort Vaccine Co LLC
Denmark
US
US
2003
First Consulting Group Inc
Computer Systems Advisers
Object Builder Software Bg
Log.Sec Corp
DynCorp
US
Fahrzeugausrustung-IT div
Germany
Bombardier Germany GmbH-IT divGermany
DWA Deutsche Waggonbau-IT div Germany
Basell Polyolefine-IT div
Germany
Royal Mail Business Systems
UK
Remaining stake
IT
Scandinavian Airlines IT co.: $1.5bn outsourcing
Financial services Mortgage software from Freddie Mac
Bio-pharma
Remaining stake in JV from Porton International
Defence
Transport
Transport
Transport
Chemicals
Transport
Top 10 DoD contractor, homeland security aims
Div. of rail component manufacturer
Div. of rail transport manufacturer
Unit of Bombardier Inc.
Plastics manufacturer: $320m outsourced
Royal Mail IT co: outsourcing deal
2002 Nortel Networks Germany GmbH Germany
Telecoms
Adds to existing outsourcing
2001 Infoser SpA
eHuset A/S
Financial services Software services for Italian banking market
IT
Bankrupt, Herlev-based IT consultants
Italy
Denmark
2000
IT Services Ltd
UK
BHP Information Technology
Australia
IA Corp-Checkvision
US
PCM Inc
US
Policy Management Systems Corp US
Energy & resourcesConsultancy from British Nuclear Fuels PLC
Energy & resourcesBroken Hill Proprietary Ltd, outsourcing
Financial services App. framework & document management s/w
IT
Network integrator
Financial services Mynd Corp, insurance software
1999
Informatica Group SpA
CSA Holdings Ltd
Prism
Enron Energy Services-Admin
Nichols Research Corp
GE Capital IT Solutions
ECS Integrated Technology
Progres Group s/w cos
CSA Holdings Ltd
Cross-sector
Systems integrator, defence, industry & telecoms
IT
Remaining stake
Defence
Missile systems
Energy & resourcesFirst large US BPO at $1.1bn
Defence & health $0.5bn merger, space, missiles, engineering
Cross-sector
Asia & EU IT services in $300m outsource
Energy & resourcesOracle rights with steel industry spin-off
Cross-sector
Boutique software companies
IT
Stake
Italy
Singapore
US
US
US
Australia
US
Italy
Singapore
-15-
a supplier profile from
ComputerWeekly
Significant CSC acquisitions: 1990 to 2011 (continued)
1998
Quotel (ITT London & Edinburgh)
Information Tech Solutions Inc
Onward Technologies Inc
T-Wack Software Group
Pergamon Informatik
SYS-AID
KPMG Pear Marwick SA
UK
US
US
US
Germany
Holland
France
1997
Pinnacle Group
Kalchas Ltd
Gruppe fur Angewandfe Infrmatik
Kobra Veheer
Grapevine
US
Cross-sector
UK
Cross-sector
SwitzerlandTransport
NetherlandsIT
UK
Financial services
ERP consultancy
Business change consultancy
Systems integrator
Baan ERP consultancy
Insurance broker software
1996
Cicero
American Practice Management
Continuum Co Inc.
Co-Cam(Colonial Group)
Mobil Corp-Maidstone Data Ctr
Datacentralen
Dan Computer Management
Germany
US
US
Australia
UK
Denmark
Denmark
Publishing
Financial services
Financial services
Financial services
Energy & services
Public sector
Public sector
Software unit of Mittelrhein Verlag
Forms Healthcare Group & eyes insurance combo
Forming Financial services group
Call centre software for insurance
Underutilised data centre, outsourcing
$168m state-owned IT arm
Government IT supplier
1995
Ouroumoff International
Weston Group Inc
Oxford Consortium
NHS Scotland
Lucas Engineering & Systems
Ploenzke AG
France
US
UK
UK
UK
Germany
Cross-sector
Cross-sector
Health
Health
Defence
Cross-sector
Pacific rim, South America
Mid-sized management consultants
Anglia and Oxford Regional Health Authority
7 datacentres as part of Scot. NHS outsourcing
1,200 staff, aerospace IT div in $750m outsourcing
World’s largest SAP house & DE’s largest SI
1994
ARC Professional Services
British Aerospace Information
DiBianca-Berkman Group Inc
Ouroumoff Consultants
US/UK
UK
EU
France
Defence
Defence
Cross-sector
Cross-sector
Military systems & services units
$45m IT div. in $1bn outsourcing
Change management consultants
Management consultants
1993 Australian Mutual.Prov.Soc. Australia
Financial services In $300m outsourcing
1992 EPC Intl-Telecoms Assets
Bank of Illinois subsidiary
Van der Giessen Software
US
US
Holland
Telecoms
Billing systems for mobile phones
Telecoms
Billing systems for mobile phones
Financial services Bought out of bankruptcy protection
1991
US
US
US
US
US/WW
Manufacturing
Defence
Financial services
Telecoms
Defence
US
UK
Financial services Dallas, software & services
Retail
Systems integrator
Paragon Consulting Inc.
Analytics Inc.
Compusource
Intelicom Solutions Corp
General Dynamics-Data Sys Div
1990 Logic Inc
Inforem
Financial services
Defence
IT
IT
Financial services
Cross-sector
Cross-sector
Insurance broker software
95% Fed, most Army & Navy, D.C.
Web app firm to boost e-services
Boutique s/w house
Boutique s/w services house
ERP & s/w services consulting
Stake, becoming one of largest Fr. SIs
Logistics consultancy
Battlefield command & control systems
First move for CSC outsourcing push
Software expertise for CSC consulting unit
IT division of weapons manufacturer
Sources: Computer Weekly/Alacrastore.com/TheFreeLibrary.com/
PRNewswire.com/US Securities & Exchange Commission
-16-